Friday, February 27, 2015

The UK Government has started a propaganda effort boasting of the results of its renewable energy auctions. There are some lessons proven here and some issues still not obvious to the casual observer.

1. The UK cut off the auction mechanism at 5 MW. Auctions do not work well for small projects and this has been proven time after time. Poland is attempting auctions for less than 1 MW and the results will surely not be stellar.

2. The UK conducted so-called "banding" where there are separate auctions for each technology. This is a procedure that follows the advice of most experts, including ECOFYS in their detailed report to the European Commission last year. The DG Competition in Brussels authorizes this, but still irrationally prefers technology neutral auctions (which they try to exempt for state aid review in the GBER regulation). Poland will try to conduct generally technology neutral auctions, broken down only by under and over 1 MW with a basket for projects producing more than 4000 MWhr per 1 MW of capacity. The mix of RES in Poland is almost certainly going to be more narrow than most EU Member States. Technologies that may be critical in future years will get ignored.

Polish politicians seem determined to ignore EU state aid rules, even in the new law. Experts have concluded that it requires notification and approval and is not fully covered by the notification exemption in GBER. A train wreck in the future? Or will they notify and blame Brussels for subsequent delays?

3. The UK published reference prices many months in advance. It takes at least 24 months or longer to develop a project to the point of being eligible to bid and Poland will only publish reference prices (the maximum auction bid allowed) 60 days before the auction. Most of the front-end development cost of a project will be at risk before the project developer knows what his revenue can be. Experience in other countries indicates this rewards dominant market players and discourages independent investment and SMEs.

4. The UK notified Brussels of its scheme and received approval. Poland maintains that it will not notify and is running huge risks of subsequent legal problems.

5. The UK propaganda focuses only on what bids were awarded and their price. It does not actually establish that those projects will be built. The press release talks as if these are already online and producing power. Virtually all auctions for RES have seen a serious depreciation in the actual capacity built - sometimes it has been zero! If the prices bid were really low, then you can expect project attrition as reality sets in and bidders sober up.* The delay between the bid awards and construction is also a major factor since all the EU Member States must meet 2020 targets. The Polish schedule is such that even a 2016 auction will not likely produce the bulk of the electricity awarded by 2020. A 2017 auction is, of course, even more problematic.

Some things were done right in the UK and Poland will have a different and less desirable result. Other issues remain to be decided in the UK. Let's see what gets built and when,

_____________________________

* Even with penalties, the bids can be done as SPVs and the entity can simply bankrupt itself in lieu of building the projects or actually paying the penalties. The deposits will never be large enough to compel construction and investment in a plant that loses money.

Wednesday, February 25, 2015

Apparently I am being censored now by GramwZielone. Some of my comments are being considered spam.

I think that this is because I am one of the only people in Poland who is accurately describing what is going on and why the RES rules are structured to favor the state-owned utilities.

Many Poles, especially in the environmental movement and in the renewable energy sector, have approached me to thank me for the commentary. They almost always say that they are glad someone is saying this, because they feel that they cannot do so. The legacy of communism or a practical view of freedom of speech in Poland?

I strongly feel that the green energy sector is under an additional measure of self censorship - every trade association in renewable energy includes the big utilities that also have green energy projects. They effectively mute the responses of the sector where the interest of the traditional utilities clashes with the emerging technologies. This is true in Brussels as well as Warsaw. [Evidence of this abounds in the new state aid guidelines for renewable energy, which in places track almost word-for-word a position paper of EuroElectric. See EuroElectric, “Renewable Energy And Security Of Supply: Finding Market Solutions,” October 2014. This
parallels EuroElectric’s “European Commission’s Public Consultation on the
Renewable Energy Strategy,” February 2012, which has language nearly identical
to the April 2014 guidelines in many respects].Further muting the RES sector politically and legally, the Brussels associations in every sector are federations of national associations (inevitably diluting their message by trying to reaching the lowest common denominator). The results are amazing to me. In Brussels, the agency charged with protecting competition has just released rules frustrating competition in RES. Policies of the European Parliament in the environment, energy and waste management are frustrated at the implementation level by a bigger lobby that is unified and not apologetic or shy about using its influence. In Warsaw, the government that complains about the cost of RES to end-users blocks legislation and rules to allow lower prices to consumers (direct sales to energy-users with lower transmission costs). PiS complains about company lobbyists[1] while PO directly uses the mechanism of government to rig the deal for state-owned utilities,[2] raising the cost to the public.One of my dreams is an aggressive trade association with European scope that is composed of entirely companies in the green energy sector with no ownership or commercial involvement in coal, natural gas or nuclear plants. Until that happens, the RES sector will continue to endure regulatory and legal hurdles, despite its broad-based support at the political level. Anyone interested in a more effective and less diluted RES industry alliance consisting of only green energy companies in Warsaw or Brussels should let me know. ____________________________________ [1] How members of PiS and other parties will learn about the RES sector without talking to the RES sector remains one of the mysteries of modern Poland.

[2] In March 2013, the news was that the
Finance and Treasury Ministries were blocking the further progress of the
new law, that eliminated or phase-out incompatible aid to co-firing and old
hydro, which mainly supported state-owned companies. The Deputy Prime Minister at the
time confirmed that the Treasury Minister had blocked the bill from
proceeding in 2013. “The pressure [on state-owned companies from the proposed new RES act] had become so strong that, in April 2013.
Tusk decided to discard the draft law on renewable energy, which had been worked
on for three years, to the waste basket and appointed a new team to work on the
bill,” Zielonewiadomosci, November 14, 2013. By June 2013, the Minister of Finance and the
Prime Minister’s office had taken over the lead on the RES bill and
subsequently removed the complete phase out of aid to co-firing plants (mostly
state-owned). Gramwzielone, June 12, 2013. Citing various Prime
Minister statements, IEO argues that: “Prime Minister also stated that the State as
the owner of energy companies (responsible for the development of nuclear
energy and resource use coal and shale gas) wants to influence them in such a
way that the interests of these companies was in line with the interests of the
state. In other words, the Prime Minister announced a deepening of the
"unity corporate and political "in power to halt significant changes
in the mix and halt modernization of the energy sector.” Delaying changes
in the law especially as to old hydro and co-firing was deemed important to the
state-owned companies. The case of the old hydro plant in Wloclawek, the state-owned company was in the middle of an IPO when the Prime
Minister’s office delayed the old law for two years or more. The Deputy Prime
Minister referred to the need to have “positive feed-back from the stakeholder ministries” including the Treasury and Finance Ministries. This culminated in firing of the long-serving
head of the OCCP (UOKiK) in February 2014 just 48 hours
after the Polish Government received a state aid complaint from the Commission. Highly regarded for her
expertise and fairness, her replacement was the same
man (a non-lawyer who majored in
English) who had headed the Council of
Ministers group that blocked the RES bill from cutting support to co-firing and
old hydro.

Monday, February 23, 2015

Historically, no one in Poland much cared for the environment. It was simply very low on the list of concerns and basically off the radar. Changes in this attitude are now, however, really profound. February 2015 polling by CBOS showed 77% public support for expanding renewable energy in Poland (higher than any other energy source). These changes manifested themselves in the debate on the renewable energy bill, where every political party jumped on the green energy issues (the prosumer amendment), except Civic Platform (PO), known also as the political office of PGE.

Civic Platform has gotten itself painted into a corner that essentially assumes whatever it good for PGE is good for Poland. While taking care to avoid seriously disrupting a major part of the nation's electricity production and distribution is a reasonable plan, measuring every change in the energy landscape solely be its effects on PGE profits and dividends is, of course, over the top. PGE and other state-owned utilities provide valuable dividends to the state (often seemingly at the expense of necessary capital improvements and modernization). These state-owned firms also provide enormous opportunities for political appointments and various types of inside dealing.

PO in the renewable energy area has fought to keep state aid for co-firing in Brussels, while failing to seek notification and approval of its support as required by the European Treaty. PO has pushed an auction plan that for big projects will be very friendly to the big state-owned utilities due to their lower cost of capital and lower IRR expectations. Studies have demonstrated pretty conclusively that the form of auctions Poland has adopted will favor big domestic utilities. If there is renewable energy in Poland, PO wants it to be as locked to the big four state-owned firms as is traditional energy.

PO has resisted reforming Green Certificates, over the advice of the former head of UOKiK, the Polish Office of Competition and Consumer Protection (back when that agency was not political and ran as a professional regulator). The reform as UOKiK noted would require levelization of support and would encourage technologies thwarted by support for co-firing and old hydro (illegal aid that drove down the value of the certificates). PO has successfully, so far, delayed any changes to push existing certificate holders into the auction system. The delays were also designed to try to get through until the ten year period for recovery or return of the illegal aid had lapsed.[1]

The delays and obfuscation on renewable energy may have so far kept the issue bottled up, but the dam is likely to burst at some point in the near future.

PO has disingenuously promised the coal miners state support which it knows cannot be approved and will not be allowed by Brussels. There have already been clear decisions in Brussels that make aid to operating coal mines incompatible with the treaty. See Mott's Blog, "Polish Deal on Coal Mines: Reality Challenged," January 19, 2015.

All of these decisions have as their focus the support of the state-owned energy sector at the expense of consumers and tax payers. The overwhelming amount o the alleged savings coming from the new renewable energy law will come simply from stopping illegal aid to old hydro plants and cutting support for co-firing. These savings could be realized in any support scheme and would be required in any event when the European Commission decides state aid case SA-37224 (DG Competition).Despite having been told in 2012 by their own government regulator and expert that these changes had to be made, PO elected to kill the bill and try to delay the issue until the time for recovery of the illegal aid had lapsed by law (ten years from 2005). This was frustrated by the DG Competition inquiry in February 2014 (which tolls the ten year period under European law). [1]Going into the 2015 elections, as a result of all of these bad decisions and some others as well, [2] PO will be the perceived sponsor of the illegal aid to the state-owned utilities, proposed illegal aid to the coal mines, and against distributed energy (which is widely viewed as the future of energy by experts, banks and even other large utilities).[3] The Government will be liable for unfair competition claims that caused the price of Green Certificates to plummet. Somewhere between 5 and 7.5 billion PLN of state support will have to be refunded by the co-firers and old hydro projects. And all of these issues may break into public awareness before the elections. While PO enjoys a major lead in the pre-election polling, there is a real issue over whether it can achieve enough seats in a new Parliament to govern outright without a coalition. Misreading of the energy issues might contribute to Parliamentary election losses (especially among certain groups of voters). PO has been misreading the polls on these issues for several years. It seems that any coalition will likely have to involve a party that is now on the other side of the renewable energy issues from PO. If the issue draws enough press before and during the election, this might finally push the new government to a more realistic and forward-looking energy policy. That is a lot of "ifs," but the real issue is how long before the dam bursts, not whether it will survive in perpetuity.

_______________________________ [1] "The hope of delaying the issue of illegal state aid and cost recovery beyond the ten year period of limitation is already crushed. The Commission inquiry in February 2014 tolls the limitations period for recovery of the aid. See Scott SA v. Commission, Case C-276/03 P, October 6, 2005. See Marc Hansen, "Recent Developments in EC State Aid Law," IBC Advanced EC Competition Law, London, 29-30 April 2004. The issue remains looming and the only question now is can the government avoid the gun fight with Brussels until after the 2015 elections." Mott's Blog, February 6, 2015.

[2] Shale gas - one of the PO energy pillars - is collapsing as a prospect in Poland every month. Other the state-owned companies are being compelled to keep drilling and even Orlen announced it wants to cut back. See Mott's Blog, "Shale Gas in Poland: the Fading Dream," February 6, 2015; Mott's Blog, Shale Gas Fades, Nuclear Energy Remains Illusive and Coal Remains Problematic in Poland; Government Stays in Denial, October 22, 2014. Nuclear energy, if it is built at all, will be the most expensive in Poland and will require more support than renewables. It also may not be ultimately approved by Brussels if it far exceeds normal commercial terms. [3] UBS, the largest private bank in the world, has declared the old electricity business model to be dying before our eyes. MIT predicts a complete turn-around in the energy business due to distributed energy, energy storage and smart grids. RWE, E.On and Vattenfall are unloading their big coal-fired plants. See remarks of Randy Mott and paper "The
European Commission's Mismanagement of State Aid Rules for Renewable Energy," PowerGen 2015, Amsterdam, June 10, 2015 (publication pending).

In Poland, at least the new law will allow energy coming out of storage to retain its renewablecharacteristic and still receive support. Article 2(13) Law of January 16, 2015.

Once the PV support system is sorted out in the new Polish rules, I expect that energy storage for PV will be cost-effective. The market perceptions are, however, lagging behind where I think technology already is.

Friday, February 06, 2015

We finally, it appears at least, have a new law on renewable energy in Poland. The process has been ugly, ignorant and often deceitful. Like all efforts at government control of economic activity, it will be full of unintended consequences. The day of reckoning in Brussels has been postponed until now, but not canceled.
The two biggest issues facing the country in RES are first the transition from one support system to another (understanding that many facilities will continue to have Green Certificates, that the quota system remains in place, and that auctions in 2016 or 2017 may do relatively little to affect the mix of RES in 2020). This issue also has the enormous problem of revolving around unnotified unlawful state aid in the form of the certificates. This year, Poland will likely get the final notice from the Commission that this has to stop, meaning that another piece of legislation trying to retroactively adjust the current system to EU law will be required. This was not done earlier for two reasons: (A) the co-firing support would have to be at least halved and maybe reduced more to meant the applicable state aid rules; (B) Polish officials wanted to make staying on Green Certificates as painful as possible to push as much as they can into the new system.
This whole strategy may or may not work depending on the actions of the European Commission. Of course, there is also a big risk of litigation in the European Court if the Commission fails to follow its own rules (which would be a unique development for DG Competition which has normally been apolitical). The hope of delaying the issue of illegal state aid and cost recovery beyond the ten year period of limitation is already crushed. The Commission inquiry in February 2014 tolls the limitations period for recovery of the aid. See Scott SA v. Commission, Case C-276/03 P, October 6, 2005. See Marc Hansen, "Recent Developments in EC State Aid Law," IBC Advanced EC Competition Law, London, 29-30 April 2004. The issue remains looming and the only question now is can the government avoid the gun fight with Brussels until after the 2015 elections.
How will these changes affect the transition to a new system? Could the Polish Government effectively manage two systems at once even without this controversy?
The second issue is the state aid implications of the new law itself. Experts have predicted that it does not satisfy the GBER exemptions from notification. Some have argued, as I have, that the GBER exemption for renewable energy is so amorphous that it is meaningless. It seems inevitable that either a path of consultations, amendments, or formal notification or all of the these will be followed to fix the problem. It also seems quite likely that this will make the 2016 auction target dates problematic.
Finally, we can at last see some winners in the new law. On-shore wind appears to be one of them. Its cost of production is dropping and it appears to be the major way the big Polish state-owned utilities expect to remain in business, while they make political decisions on coal that continued to have major negative financial effects on their balance sheets. PV seems to be in balance, it a difficult position in the big auction with head-to-head competition with cheaper technologies (onshore wind). This will decrease over time as PV productivity is on an amazing journey to parity. PV in the small auction will be capped, in effect, by the 4000 hour rule (allowing a limit to be placed on how much energy comes from sources that produce less than 4000 hours per MW per year). PV will likely do well in the basket where it can bid in the small auction based on figures we see from auctions elsewhere in Europe.
The other small auction beneficiaries will be biogas and biomass CHP plants., Because they can produce more than 4000 hours a year. The reference prices set by the Government as long as they are somewhat based on costs of production (which is legally mandatory), will be less important than the size of the 4000 hour basket. We also expect that 25% of the support for projects under 1 MW will be hard to pull off. This is especially true for new small projects which have generally been sailing against a gale force wind for at least the last three years. It is hard to imagine where 250-500 MW of small projects will come from each of the next four years.
Lastly, a word on "lobbyists," who are identified as major villains by at least one of the major parties in Poland. Lobbying the government where its actions affects your rights and livelihood is literally as old as the Magna Carta: "The concept of lobbying in Europe originated in 1215 AD, when King John of England gave the barons the right to petition him to protest any violation of their new rights under the Magna Carta. This right “to petition the government for a redress of grievances” is also the current basis of lobbying in the United States, where lobbying became common practice in the 1830’s. Thus, it can be said that lobbying is originally based on the right to be heard." LINK. In Poland, numerous historical examples mirrored or even preceded the Magna Carta, like the liberum veto. The basic premise was that when the state tried to restrict your freedom or property, you had a right to be heard.
This right to be heard takes on new meaning in the complexities of modern society. The people with the most knowledge of a sector like renewable energy, are the people who work in that sector. Literally no one else has much of a chance of understanding how things work. Just listen to a Parliamentary debate on this subject to see how little information actually reaches the politicians. Listening to the sector itself through its lobbyists and also involving other stakeholders is part of democracy. It is a principle reason why hundreds of thousands of Poles died in the history of this country to place us in the position that we are in today.
Defects in the new law are generally related to the failure of this process in a system where Polish politicians are still learning how a democratic government is supposed to work. The biggest villains in the drama have sat in meetings that no one could see and where no records were kept, when the state-owned utilities met with the Treasury Ministry - their owner- and privately decided how they can bend the system to their favor. The public interest is the first casualty and the means of democratic governance are inevitably undermined.
Note: I guess that I could not avoid talking about how we got here!

In 2013 the US Energy Administration estimated that Europe contained 470 trillion cubic feet (Tcf) of potentially recoverable shale gas, equivalent to 80% of US reserves. Given the size of Europe’s potential shale gas reserves and the EU’s declared intent to constrain climate change, while still protecting energy security, it is surprising that exploration for shale gas has been so little and so slow. Poland, the UK, France, Ukraine, Romania and Germany are all countries, which are estimated to have significant shale gas resources, but, with only 55 rigs in operation, knowledge of Europe’s geological share heritage is sparse, though early indications are that the shale plays are deeper at around 5000-6000 metres compared to 3000-4000 metres in the US.

"There is no escape from the second obstacle namely high cost. Europe’s deeper shale plays and more complex geology adds to costs. Deep shale plays require heavier and stronger rigs and pumps, more fracking fluids, water and sand. To drill a 6,562-foot horizontal well in Poland costs around $11 million, if you are lucky, reported Bloomberg January 2014. As Rex W. Tillerson, CEO of Exxon Mobil explained, “Because the technology we have used so successfully in the States is simply not working on the Polish geology someone is going to have to spend a lot of money into basic R&D before it’s going to work”, reports Bloomberg November 2014. "

Add to these problems the fact that you cannot own mineral rights in Poland and that the Government will automatically want a big cut and anyone hoping for a breakthrough here looks pretty naive.

About Me

BA with honors, history and political science, University of Iowa; JD, Georgetown University Law Center; National Moot Court Champion(Best Team, Best Advocate, Best Brief).
Commissioned U.S. Army Reserve officer; Commandant's List Infantry Officer Basic Course, Ft.Benning, Ga.